Franchising: Master Franchise Agreements

James O’Brien, Franchising Director of Executives Online, introduces the basic concept of master franchising and provides practical advice to the potential master franchisee, to ensure the success and long term goals are achieved.

Statistics from a recent NatWest/British Franchise Association (BFA) survey showed the franchise sector is proving resilient despite the economic downturn. Although there is no 100% guarantee of success, franchising can offer a safer option to that of ‘going it alone’ by giving you financial control of owning your own business, combined with support of a historically successful company. For many well-established franchises entering into a master franchise agreement, also known as the best kept secret in the investment world, is seen as the next successful milestone.

Firstly, it’s important to define what we mean by a master franchise. Expanding an existing franchise system into one offering master franchise agreements is the process in which the Franchisor has contracted with a person or entity to sell and provide services to sub-franchisees in a specified territory, for example South East Asia. In a typical situation the master franchisee will pay the parent franchise company (the Franchisor) an initial fee for the rights to develop the territory and then retains most, or all of the initial fees and royalties paid over time by the individual franchisees in the territory.

Entering into a master franchise is a completely different concept to a single unit franchise as the latter will have started the business with the desire to actually run it, whereas the master franchisee does not necessarily have such an aspiration – they will be more motivated towards managing the business. More specifically, the master franchisee will be required to support the sub-franchises and be responsible for recruiting the necessary staff to run them and to market potential franchise owners in order to expand the franchise further within the specified territory.

But why would someone want to enter into a master franchise? Even though the scale of investment from the outset is inevitably higher, a master franchise can be extremely attractive in regards to both long term ROI and growth potential, as well as the added benefit of having access to an entire support network of advertising, training and consulting from the Franchisor. Although master franchise agreements will vary in scope and complexity with each individual franchisor, one fact remains clear – such an agreement can open up significant opportunities to secure steady income and build true wealth. Generally, master franchise agreements not only give the master franchisee the rights to offer and sell individual franchises, but also the rights to collect a pre-determined percentage of the fees and royalties generated by each unit sold. Income can also be generated from additional fees and services from the sale of products and services into the territory. These income opportunities are the main reason why they are coveted by the investment world.

It is clear to see that there are long term commercial benefits when entering into a master franchise however it’s important for the master franchisee to realise that he or she must be prepared to accept that although such an agreement can give much more freedom of choice in terms of managing the business and making vital decisions, it also means that the risks are higher for them, if things go wrong. The first main challenge, as in all business ventures, is calculating and overcoming these risks. In order to both manage and minimise your risk you might want to consider partnering with other industry experts to acquire the necessary skills and knowledge. It would also be beneficial to establish whether or not you need to change existing business models to ensure complete alignment with the entire territory as part of your market research, as well as employment contracts to attract the skills and experience required.

Although there is much to consider before entering into a master franchise agreement, time is also of the essence. Often people have taken too long to make the decision and then found that someone has beaten them to it. Master franchises are hot commodities and the industry is saturated with so called ‘franchise experts’ who are kicking themselves for not striking while the iron is hot!

Of the countless questions the master franchisee will need to address, here are just few:

Do you understand the scale of the investment?

What is your business structure?

Where are you going to base the business and is it attractive to potential customers, franchisees and staff?

What facilities do you need?

What kind of support is offered by the franchisor?

To say there is no risk with a single unit franchise would be untrue – but with a master franchise the risk and challenges are intensified. A master franchisee needs to have strong sales acumen with robust business savvy to build the value of the brand around the operation. They need to have skills to be able to identify market trends and be highly ambitious. If this is you and you are prepared to meet the challenges and reap the benefits then welcome to master franchising.

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